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Eduncle posted an MCQ
October 19, 2019 • 17:26 pm 0 points
  • UGC NET
  • Economics

The statement, ?Too much money chasing too few goods? is based on which of the following theoretical concepts ?

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    Eduncle Best Answer

     "Too much money chasing too few goods" best describes the Quantity Theory of Money. The quantity equation says
     
    where the bar over V means that velocity is fixed. Therefore, a change in the quantity of money (M) must cause a proportionate change in nominal GDP (PY).  This theory explains what happens when the central bank changes the supply of money. Because velocity is fixed, any change in the supply of money leads to a proportionate change in nominal GDP. Because the factors of production and the production function have already determined real GDP, the change in nominal GDP must represent a change in the price level. Hence, the Quantity Theory of Money implies that the price level is proportional to the money supply". Or in other words, when money supply rises and given a fixed real GDP or output, it is too much money in circulation which is chasing relatively lesser amount of goods. It is to be noted that in the Quantity Theory of Money, money balances are hold for transactions alone. Since output cannot multiply, too much money, in the wake of the rise in money supply, will increase the price level 

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